Donald Trump’s U.S. election victory became evident a few weeks ago. On the back of a more liberal, less regulated market environment, markets have advanced further. However, rich valuations, lofty earnings targets, and risks around CB policy timing should give investors some concerns.
Key Takeaways
- Stock markets continue to rally following GOP wins for the White House and the Senate, with bond markets taking a defensive stance.
- The exuberance witnessed recently in the stock market is backed by a promising future of AI supported processes that may propel equity valuation even higher. However, immediate earnings prospects are tricky and the potential ramifications of further tariff action which are inflationary, could lead to a pronounced stock market correction.
- Prudent investors should consider profit-taking while exploring opportunities in large-cap value, mid-cap growth, and emerging markets.
Against expectations and market research data, the former present Donald Trump features a decisive win for the Republican Party. Equity markets advanced, based on the expectation of lower taxes and looser regulation with financials and cryptocurrencies clear winners. During his election campaign, DT had vowed to stop the launch of a US central bank digital currency (CBDC), but with EM closely involved through his advisory role, one can expect that digital money’s momentum will further shift from retail towards wholesale CBDCs which in essence is beneficial for corporates.
On the other side of the investment spectrum, bond investors weighed in with some concern, sending 10-year Treasury yields higher by almost 20 basis points. The worries fixed-income investors push forward are centered around renewed unfunded tax cuts and the potential strain on the country’s debt load. Finally, when taking into consideration the broader long-term picture, we note another paradox. On the back of higher rates, the U.S. dollar has made gains, crushing other currencies globally, especially in emerging market countries. One could have expected a status quo or the opposite development since the supremacy of the United States of America and defacto the USD is going to be challenged more than ever in the next 4 years.
Investment ramification for 2025
We don’t recommend chasing trends aggressively going into 2025, but rather recommend implementing a balanced and diversified portfolio based on three concerns about the market’s recent enthusiasm.
- Equity valuations remain stretched
- Corporate earnings targets are lofty
- Risks loom around policy timing
At some point, investors must reckon that equity valuations are rich – PE FWD is at 23 while the historic average is 17). In particular, long-duration business models are particularly sensitive to interest rates. Higher rates often raise borrowing costs and curb consumer spending. This in turn is expected to drag corporate profitability, while also making future earnings look less attractive.
Average corporate earnings estimates for 2025 indicate a profit growth of 15%. This is somehow in contradiction with actual earnings growth, which is lower than 10%, and the weaker-than-expected productivity growth spells trouble too.
Under the new administration, U.S. multinationals face new obstacles with tariffs, potentially raising borrowing costs and a stronger USD which make them less competitive.
For now, it is business as usual for the FED. Yet with the oncoming changes by the new administration, policy sequencing will be critical to ensure that growth-stimulating efforts reach industries. Oftentimes, deregulation and lower taxes are no longer offset by new disruptive efforts. More importantly, tariffs that raise prices in the U.S. and curb immigration are generally solid soil for an inflationary environment. The latter could be particularly true for the agribusiness and the food transformation business.
Short-term versus long-term investors
Considering the risks in the stock market, multiple investors might be exposed to a higher level of risk than they can stomach.
Prudent investors are advised to take profits in the S&P 500 while looking for opportunities within cash-flow-intensive mid-cap growth companies as they tend to suffer less during market corrections. Alternatively, one can consider large-cap opportunities in emerging markets as currency volatility has surged.
Investors with long-term investment horizons and not requiring any immediate cash flows should consider rebalancing portfolios and pursuing maximum diversification across equities and bonds, as well as in real assets, hedge funds, and private investments.